Effective January 1, 2024, millions of privately-owned small businesses will be subject to new reporting obligations under the Corporate Transparency Act (CTA), a new anti-crime law that seeks to uncover the concealment of illicit money through the use of shell and front companies.

In an effort to increase transparency of true ownership behind anonymous corporate structures, entities will be required to file a Beneficial Ownership Information Report with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

Who is required to report beneficial ownership information to FinCen?

A wide net is cast across the business community requiring both domestic and foreign “reporting companies” to disclose their beneficial ownership information.

Domestic and foreign reporting companies include corporations, limited liability companies, or other entities established by filing documents with a state secretary or Indian tribe or formed under foreign laws and registered to operate in the US or tribal jurisdiction. Sole proprietorships and trusts whose formation are not dependent upon filing with a secretary of state or other government agency are generally not a reporting company.

Business entities formed prior to January 1, 2024, have one year to comply with the new requirements and must file by January 1, 2025. Businesses formed after the effective date of January 1, 2024, will be obligated to file a report within 30 days of formation.

Information about the reporting company must include:

• Full legal name
• Any trade or DBA name
• Current Address
• Formation jurisdiction
• Federal tax ID number

The report must also include information on its “beneficial owners,” defined as individuals who directly or indirectly own or control at least 25 percent of the entity or any individual that exercises substantial control over the company, even if they have no ownership in the company. If a trust is an owner of a reporting entity, the beneficial owner(s) of the trust also need to be reported.

Information about beneficial owners must include:

• Full legal name
• Birth date
• Current address
• Unique identifying number and issuing jurisdiction from an acceptable identification document (i.e., driver’s license or US passport) and an image of the document.

Lastly, if the entity is formed on or after January 1, 2024, the “company applicant,” defined as the person who directly files the document that creates the reporting company, will also need to include identifying information in the report. In many cases this will be a beneficial owner, but third parties such as attorneys may also be considered a company applicant.

Because many private companies have historically enjoyed a great degree of privacy involving internal matters, concerns over exposing the identities of their owners have been top of mind.

To safeguard the privacy of owner information, FinCen established a secure, non-public registry accessible only by authorized governmental agencies used to investigate suspicious activities and prevent financial crimes.

Who is exempt from filing a report?

Most of the entities exempt from filing a report are regulated entities that are subject to ongoing reporting requirements and already submit beneficial ownership information to regulators.

There are twenty-three types of businesses exempt from the reporting requirements and include entities such as banks, credit unions, registered broker dealers, insurance companies, public utilities, certain tax-exempt entities, and certain inactive entities that existed prior to January 1, 2020, among others.

Further, entities that have twenty or more full-time employees in the US, filed a federal income tax returns for the previous year showing more than $5 million in domestic gross receipts, and have an operating presence at a physical office in the US are not required to file.

What if there are changes to the filing document?

If a reporting company has any changes in the information provided about either the reporting company or its beneficial owner(s), or if it becomes eligible for an exemption, it is necessary to amend the filing document and submit an updated report within 30 days after the date on which the change occurred.

What are the penalties for non-compliance?

The penalties are steep for any person who willfully fails to file a report in its entirety or fails to provide an updated report with FinCEN. Fines can be up to $500 per day (up to a maximum of $10,000) and imprisonment for up to two years.

Due to the strict filing requirements and expensive penalties, business owners may consider requesting professional assistance to ensure compliance and avoid any violations of the new law.

What should small businesses do now to prepare?

With only a few months left before the new reporting requirement takes effect, businesses should be diligent in determining whether their business is a reporting company and therefore will be subject to the new rules. It may also be advantageous to implement a system to keep track of the reported information so owners and executives know when updates should be reported.

This is a complicated new reporting regime, and the above information is just a summary, so there may be other aspects to consider for your individual situation. It is recommended that you contact your attorney or other legal counsel to make sure you are ready to comply with the reporting requirements.